ENERGY RISK MANAGEMENT
CONSIDERATIONS
John Robinson
Texas Cooperative Extension
 Context of higher energy prices
 Hearings & calls for government
policy intervention
On-farm risk mgmt. steps
 Evaluate the risk exposure
 Identify alternative strategies
including hedging possibilities
 Evaluate the cost of each alternative
(i.e., is it a good insurance buy?)
Identify public & private resources to
implement alternatives
Available
Public Resources
 Extension crop budgets, energy
crop profiles, and detailed
machinery analysis, e.g,
 U. Florida series,
http://www.agen.ufl.edu/~fees/pubs/agcrop.html
Purdue publication analyzing tillage systems
http://www.agcom.purdue.edu/AgCom/Pubs/NCR/NCR-202.html
 Extension info. on energy saving
tips, bmp’s, and new technology
 USDA-ERS & OCE analysis of
energy fundamentals/Ag impacts
Help Producers Size Up Their
Situation: Energy Inventory
Source: Florida Energy Extension Service:
http://www.agen.ufl.edu/~fees/pubs/agcrop.html
Evaluate Risk Exposure:
Total Energy Use in Btu’s
 Do an inventory of total energy
use with a Btu Conversion Chart
Gasoline
Diesel fuel
LP gas
Nat. gas
Electricity
Nitrogen
Phosphate
Potash
Pesticides
125,000 Btu’s/gal
138,690 Btu’s/gal
98,300 Btu’s/gal
1,030 Btu’s/ft3
3,413 Btu’s/kwh
55.21M Btu’s/ton
12.34M Btu’s/ton
10.43M Btu’s/ton
215.41M Btu’s/ton
Source:
ERS
Evaluate Risk Exposure:
Input Energy Use in DFE’s
Urea, solid
28% N liquid
NH4NO3, solid
NH4NO3, sol’n
Anh. Ammonia
0.233
0.229
0.248
0.225
0.177
gal/lb
gal/lb
gal/lb
gal/lb
gal/lb
Total N for typical corn
26.6 gal DFE/ac
Machinery fuel (conv. til.) 5.0 gal DFE/ac
Machinery fuel (no. til.)
1.8 gal DFE/ac
Herbicides (conv. til.)
1.7 gal DFE/ac
Herbicides (no. til.)
2.9 gal DFE/ac
Source: http://www.agcom.purdue.edu/AgCom/Pubs/NCR/NCR-202.html
Evaluating Risk Exposure:
Sensitivity Analysis
Repfarm analysis of higher natural
gas prices and crop prices on
irrigated farms: “Effects of Energy
and commodity Prices on Irrigation
in the Kansas High Plains (SRP611)
http://www.oznet.ksu.edu/
library/engy2/samplers/srp611.htm
Agric. Energy Risk
Management Alternatives
 Technology Approaches
Reduced Tillage
Proper equipment selection, R&M
Substitution away from crops with
higher nitrogen requirements
 Purchase and storage of fuel
 Forward contracting and/or
hedging input costs with energy
futures/options
Available Private Resources
for Contracting Alternatives
 Trading consultants and brokers
 Energy hedging consultants
 NYMEX exchange information
 Agricultural Cooperatives
Theory & Practice of
Agric. Energy Hedging
 Correlation of fuel and fertilizer
prices with NYMEX futures
Natural Gas (very actively traded)
Also a proxy for anhydrous ammonia
Home Heating Oil (for diesel fuel)
Propane
 Whole new set of fundamentals
and seasonality considerations
 Scale Considerations
Contract Information
 NYMEX Natural Gas
Futures: 10,000 million Btu’s
Oct. ‘01 Futures: $2.103/mmBtu
At-the-money call: $0.080/mmBtu,
or about $800 premium for one
contract
 NYMEX No. 2 Fuel Oil
One Futures Contract: 42,000
gallons
Oct. ‘01 Futures: $0.7087/gal
At-the-money call: $0.024/gal, or
$1,008 premium for one contract
On-Farm Energy
Hedging Considerations
 What is the impact of a 2X or 3X or 4X rise in
natural gas or diesel price?
 Is the impact of this risk significant relative
to other risks that need managing?
 Is hedging nat. gas or heating oil futures
realistic in terms of type and scale of the
enterprise?
 Is it feasible in terms of correlation between
futures and farm-gate energy prices?
 What to hedging alternatives cost? Are they
a good insurance buy?
Example: Diesel Fuel for
Delta Cotton Operation
 Typical Delta operation with conv.
tillage uses 18.3 gallons of diesel per
acre, or over $20 per acre.
 Need 2,300 acres to match the size
of one No. 2 heating oil contract
 An Oct. ‘01 at-the-money call on
NYMEX No. 2 Heating Oil futures
costs about $0.44 per acre
 Questions: How well does this
contract track on-farm fuel prices,
and what basis are we facing?
Example: Hedging
Nitrogen costs
 Typical Delta operation uses 400 lbs
of N32 per acre, or $37 per acre.
 Need 2,300 acres to match the size
of one No. 2 heating oil contract
 An Oct. ‘01 at-the-money call on
NYMEX No. 2 Heating Oil futures
costs about $0.44 per acre
 Questions: How well does this
contract track on-farm prices, and
what basis are we facing?